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It is known that proceedings under section 397/398 of the Companies Act, 1956 are always complicated. There will often be criticism that the jurisdiction of Company Law Board (CLB) under section 397/398 of the Companies Act, 1956 is being misused. At the same time, there is criticism on the effectiveness of the jurisdiction being exercised by the CLB in order to prevent oppression and to put an end to the matters complained of. In many cases, the CLB may not be able to come to a quick conclusion as to what is going-on in the Company and the CLB may hesitate to pass drastic orders against the Company unless it is convinced of the issues after listening to the Company or the majority in the Company. Any adverse order against the Company will have its own implications and the functioning of the Company and the business prospects may also come to standstill at times with the proceedings of the Company Law Board. While the non-adherence to corporate governance and the technical issues are pitched against the Company, the CLB may not be able to pass any orders based on mere non-compliance of statutory provisions of law. The CLB often looks at equity and in some cases; the CLB may have to look at complicated legal issues and variety of arrangements among shareholders or the groups in the Company.

When a group comes to Company Law Board alleging oppression and mismanagement against the majority in the Company, and if the two groups see no scope for compromise, then, there will be hectic and continuous litigation in-respect of the affairs of the Company. When the issue of oppression and mismanagement is contested strongly, then, the minority or the petitioners may be presenting several interim applications praying the Company Law Board to direct the majority not to exercise any powers which will affect interests of the minority pending litigation. Under section 397/398 of the Companies Act, 1956, any number of interim applications can be filed and in order to put an end to the matters complained of, the CLB is empowered to pass any orders within the purview of settled legal principles with regard to the powers of Company Law Board under section 397/398 of Companies Act, 1956.

There may be a case where the minority presents the petition with limited facts and the minority may come to know several issues after filing of the Company Petition and it is very much possible. As and when the information comes, the minority can also be changing their stand and may want to take advantage of the fresh details. This ground reality in respect of many closely-held companies or the family companies, makes the functioning of Company Law Board very complicated. It is very difficult for the Board, at times, to pass orders in a proceeding under section 397/398 of the Companies Act, 1956. In most of the cases, the Company Law Board encourages the warring groups for an amicable settlement and in some cases, the effort will be on convincing a group to buy another group and so that the deadlock ends.

It would also be extremely difficult for the Company Law Board to go through all the facts presented, the counter statements, and the proceedings.  Thus, except in simple cases, the disposal of company petition under section 397/398 of the Companies Act, 1956 takes time. Again, an interim order passed by the Company Law Board under section 397/398 of the Companies Act, 1956 is an appeallable order on some grounds under section 10 (F) of the Act.  Rather the final proceedings of the Board in a petition under section 397/398 of the Companies Act, 1956, the interim proceedings will often leads to much litigation. There is no bar on the petitioners to present interim applications from time to time though the interim applications were dismissed initially saying that there is no prima facie case.  Nothing prevents the Company Law Board to take any new facts presented in the course of the proceeding and pass orders. There may be a technical thing that if the petitioners want to plead any additional facts, the main Company Petition should accordingly be amended. In my opinion, all these technicalities can be ignored by the Company Law Board under section 397/398 of the Companies Act, 1956.  Technicalities are time consuming and in my opinion, technicalities can be ignored in a proceeding under section 397/398 of the Companies Act, 1956 to the extent possible.

Case Study:

Below is the extract of a judgment rendered by the Calcutta High Court and it is a wonderful case for consideration. In this case, some interim applications were dismissed by the Company Law Board initially saying that there is no prima facie case. Thereafter, the petitioner has also brought certain fresh details to the knowledge of the Company Law Board and sought further interim orders. The CLB, at the second instance, convinced of passing a detailed interim order or directions and the same is challenged to the High Court and there the Appeal is partly allowed.  The main issue discussed in the following judgment is like:

“Can the Board allow interim applications and give directions to the Respondents if the Board initially rejects all the interim applications filed by the Petitioners under section 397/398 of Companies Act?”

The extract of the judgment delivered by the Calcutta High Court on 16.09.2011, in ACO No. 71 of 2011, between BIRLA CORPORATION LTD vs. BIRLA EDUCATION TRUST & ORS, is as follows:

“6. The proceeding before me is at the interim stage only and on behalf of the appellant, that is the company, prayer has been made as an interim measure, for stay of operation of Paragraph 85(vi) of the order, pending final decision in the appeal. On behalf of the appellant, it has been submitted that the transactions of the company under the CBLO and MIBOR were all valid transactions. It has been argued that the CLB has committed jurisdictional error in passing the order under Section 402 of the Act, as the scope of interim order under Act is required to be passed in terms of Section 403 of the Act only. The other ground on which I have been addressed is that in the order passed on 9th February 2011 the CLB had come to a finding that there was no prima facie case of mismanagement, and no subsequent event had taken place which required the CLB to take a diametrically opposite stand in C.A. No 302 of 2011. In this regard, the learned Counsel for the appellants sought to attract the principle of res judicata.

7. On behalf of the respondent no.7, supporting the appellants, it was contended that it was impermissible on the part of the applicants to come with an interlocutory application with the factual allegations at variance with the pleadings that form foundation of the original complaint contained in the main company petition. The main case of the respondent nos. 1 to 6 being the applicants before the CLB is that when the company petition was filed, the notice for postal ballot seeking to drastically alter the main business line of the company was not in existence, and the annual report of the company containing the accounts for the year 2010-2011 was also not available. It was contended that the applicants came to learn the details of CBLO and MIBOR transactions subsequent to 9th February 2011. Further submission on behalf of the respondents/applicants has been that these subsequent acts on the part of the company formed part of a chain of activities resulting in mismanagement of the affairs of the company which were oppressive to the minority shareholders, and such subsequent facts could be brought to the notice of the CLB by filing an interlocutory application in the subsisting proceeding, and for each of these acts, filing of a fresh petition was not necessary.

8. On the latter point, that is whether a new petition was required to be filed or not, the CLB, in the last paragraph of the order, i.e. paragraph 85(vii) has issued direction which is in the nature of direction for amendment of the original company petition. On behalf of the appellant, the legality of such a direction was questioned. But that issue I propose to deal with at the stage of final hearing of the appeal. In this order, I shall confine my scrutiny to the directions contained in paragraph 85(vi) of the order impugned, by which investigation of the dealings of the company to ascertain profits made through such dealings by the company and Lodha Capital Markets Ltd., PLC Securities Pvt. Ltd. and others through whom such transactions were done, has been directed by an outside audit firm, Ernst & Young. The appellant has questioned the choice of the audit firm also, on the ground that the said firm does audit work for several companies belonging to different branches of the Birla Group, being the industrial house having presence in several areas in the corporate sector of this country. This issue was raised as there are several proceedings pending in different forums in which the members or associates of the said family and the respondent no.7 are involved over a dispute relating to grant of probate of the will of Priyamvada Devi Birla (since deceased), who had controlling interest in several companies and other entities of a branch of Birla Group known as the M.P. Birla group. The appellant company also belongs to the said M.P. group. Though in the main company petition the authority or power of the respondent no.7 over the estate of said Priyamvada Devi Birla, which includes 62.9% of the shareholding of the appellant company has been questioned, before me at this stage arguments have been primarily presented on behalf of the applicants as minority shareholders having grievance over the acts of the majority, which they consider oppressive and prejudicial to their interest, interest of the company as also public interest.

9. As I have already discussed in the earlier part of this order, there have been interlocutory proceedings in the past among the same parties on the allegations of mismanagement and oppression and plea for various interim reliefs was turned down by the CLB in the order passed on 9th February, 2011. The instant application, i.e. C.A. No.302 of 2011 was filed on the ground of occurrence of certain subsequent events to which I have also referred to earlier in this order. So far as proposal for alteration of the memorandum of association of the company is concerned, if the resolution was carried through, that might have had resulted in unalterable situation so far as the activities of the company is concerned, and I shall test the legality of that issue at the stage of final hearing of this proceeding. But the CLB has already directed not to give effect to the said notice for postal ballot and stay of operation of that part of the order has not been pressed before me at the interim stage by the appellant. If the postal ballot notice is not given effect to, in the light of the earlier order of the CLB and its observations made in the said order passed on 9th February 2011, can the order for audit investigation in the manner directed be justified?

10. In my opinion, within such a short span of time the Company Law Board ought not to have come to an altogether different finding at the prima facie stage so far as it directed investigation into the dealings of the company in the money market. In my opinion, the events subsequent to 9th February 2011 would not have justified formation of fresh opinion, even at prima facie level, requiring investigation into the financial dealings of the company. Such financial transactions seemed to be going on since 2008-09. Substantial argument was advanced on the legality of the transactions conducted through CBLO and MIBOR. The other complaint made was rapid frequency of the transactions in relation to the investments of the funds of the company, which according to the applicants did not constitute investments made by a company of its surplus funds in normal course, but constituted trading in financial products. But the CLB has not come to any finding that such transactions are impermissible or cannot be entered into by the company on the ground that such dealings would constitute dealing in financial products, at present not mandated by its memorandum of association. As transactions of this nature had been going on when the earlier order was passed by the CLB, in the absence of there being any fresh finding that these transactions were illegal, I do not think, prima facie, an investigation by an outside agency is warranted at this stage.

11. On behalf of the applicants, it was submitted that the order passed on 9th February 2011 was not sustainable in law and the observations and comments made in the said order ought not to be given credence to by this Court. The appeal against that order has also been assigned before me and I am hearing that appeal. I am not making any observation in this order as regards the legality of the order passed on 9th February 2011. But so far as the CLB is concerned, I do not think subsequent facts justified directing investigation into the dealings of the company when the Board itself had opined earlier that the applicants had not made out any prima facie case.

12. It was brought to my notice in course of hearing that the order passed by the CLB on 9th February 2011 and 17th June 2011 were by different members of the Board. But I do not think on a subsisting set of facts the CLB ought to take different view through different members in different interlocutory proceedings arising out of a single company petition.

13. It was also submitted on behalf of the applicants that such investigation would not in any way prejudice the company. Mere fact that a particular direction would not prejudice a company would not justify passing an order directing something to be done which in normal course would not be permissible.”

Source: www.indiankanoon.org.

Note: the views expressed are my personal and a view point only.


V.DURGA RAO, Advocate, Madras High Court.

Email: vdrao_attorney@yahoo.co.in

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Durga Rao
Category Corporate Law   Report

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